<PAGE>

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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                   FORM 10-Q/A


  [X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
       SECURITIES EXCHANGE ACT OF 1934

                  For the quarterly period ended June 30, 1998

                                       OR

  [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
      SECURITIES EXCHANGE ACT OF 1934

  For the transition period from ______________to______________

                         Commission File Number 0-20191 

                                   * * * * * *

                               ODS NETWORKS, INC.
             (Exact name of Registrant as specified in its charter)


            Delaware                               75-1911917    
-------------------------------              ----------------------
(State or other jurisdiction of                (I.R.S. Employer
incorporation or organization)                Identification No.)


                 1101 East Arapaho Road, Richardson, Texas 75081 
                 -----------------------------------------------
                    (Address of principal executive offices)
                                   (Zip Code)

                                 (972) 234-6400 
              ---------------------------------------------------
              (Registrant's telephone number, including area code)

                                 Not Applicable 
                   ------------------------------------------
                   (Former name, if changed since last report)

                                   * * * * * *

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes X No

                                   * * * * * *

The number of shares outstanding of the Registrant's Common Stock, $.01 par
value, on July 31, 1998 was 16,887,233.

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<PAGE>


                               ODS NETWORKS, INC.
                               ------------------

                                      INDEX

                         PART I - FINANCIAL INFORMATION

                                                                    PAGE
                                                                    ----
Item 1.  Financial Statements

Condensed Consolidated Balance Sheets as of June 30, 1998
     and December 31, 1997 . . . . . . . . . . . . . . . . . . .      3

Condensed Consolidated Statements of Operations for the three
     months ended June 30, 1998 and June 30, 1997. . . . . . . .      4

Condensed Consolidated Statements of Operations for the six
     months ended June 30, 1998 and June 30, 1997. . . . . . . .      5

Condensed Consolidated Statements of Cash Flows for the six
     months ended June 30, 1998 and June 30, 1997. . . . . . . .      6

Notes to Condensed Consolidated Financial Statements . . . . . .      7

Item 2.  Management's Discussion and Analysis of Results of
         Operations and Financial Condition. . . . . . . . . . .      10


                           PART II - OTHER INFORMATION

Item 4.  Submission of Matters to a Vote of Security Holders . .     18

Item 5.  Other Information . . . . . . . . . . . . . . . . . . .     18

Item 6.  Exhibits and Reports on Form 8-K. . . . . . . . . . . .     18

Signature Page . . . . . . . . . . . . . . . . . . . . . . . . .     20

                                      -2-

<PAGE>



                         PART I - FINANCIAL INFORMATION

Item 1.  FINANCIAL STATEMENTS.

                       ODS NETWORKS, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                    (In thousands, except par value amounts)


<TABLE>
<CAPTION>
                                                 June 30,    Dec. 31,
                                                  1998        1997
                                               ----------  -----------
                                               (Unaudited)
                                               As Restated
<S>                                            <C>         <C>
                                ASSETS
Current Assets:
   Cash and cash equivalents                     $12,343      $17,911
   Short-term investments                          8,960       14,667
   Accounts receivable (net)                      14,876        8,668
   Income taxes receivable                           527        3,159
   Inventories                                    16,217       14,671
   Deferred tax assets                             2,524        1,721
   Other assets                                    1,181        1,221
                                                 -------      -------
Total current assets                              56,628       62,018

Property and equipment (net)                      11,912       11,836
Long-term investments                              2,756        3,168
Intangibles, net                                   7,173           -
Equity investments                                 1,835           -
Other assets                                         164          156
                                                 -------      -------
TOTAL ASSETS                                     $80,468      $77,178
                                                 =======      =======


                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
   Accounts payable                              $ 7,875      $ 5,381
   Accrued expenses                                3,896        3,328
   Deferred revenue                                1,990        1,462
                                                  ------       ------
Total current liabilities                         13,761       10,171

Deferred tax liabilities                           2,282          628
Capital lease obligations                             12           -

Stockholders' Equity:
   Preferred stock, $.01 par value,
      Authorized shares - 5,000
      No shares issued and outstanding
   Common stock, $.01 par value,
      Authorized shares - 80,000
      Issued and outstanding shares - 16,887
      in 1998 and 16,486 in 1997                     169          165
   Additional paid-in capital                     22,698       19,488
   Retained earnings                              41,849       47,032
   Foreign currency translation adjustments         (303)        (306)
                                                 -------      -------
Total stockholders' equity                        64,413       66,379
                                                 -------      -------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY       $80,468      $77,178
                                                 -------      -------
                                                 -------      -------
</TABLE>

                             See accompanying notes.

                                     -3-
<PAGE>



                       ODS NETWORKS, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                   Three Months Ended
                                                ---------------------------
                                                  June 30,       June 30,
                                                    1998           1997    
                                                -----------    ------------
<S>                                             <C>            <C>
                                                 As Restated
Net sales                                          $25,215        $27,868
Cost of sales                                       14,389         16,076
                                                   -------        -------

     Gross profit                                   10,826         11,792

Operating expenses:
     Sales and marketing                             8,134          7,877
     Research and development                        2,932          2,823
     In-process research and development             2,300            -
     General and administrative                      1,491          1,258
                                                   -------        -------
Operating loss                                     (4,031)          (166)

Interest income, net                                   356            374
                                                   -------        -------

Income (loss) before income taxes                   (3,675)           208

Income tax (benefit) provision                        (538)            79
                                                   --------       -------

Income (loss) before equity in affiliate            (3,137)           129

Equity in net income (loss) of affiliate               (72)            -  
                                                   --------       --------

Net income (loss)                                  $(3,209)       $   129
                                                   -------        -------
                                                   -------        -------

Basic and Diluted income (loss) per share          $ (0.19)       $   .01
                                                   -------        -------
                                                   -------        -------

Weighted average common shares outstanding          16,739         16,423
                                                   -------        -------
                                                   -------        -------

Weighted averages shares outstanding assuming
   dilution                                         16,739         16,753
                                                   -------        -------
                                                   -------        -------
</TABLE>



                             See accompanying notes.

                                     -4-

<PAGE>




                       ODS NETWORKS, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                     Six Months Ended
                                                ---------------------------
                                                   June 30,       June 30,
                                                    1998           1997    
                                                -----------    ------------
<S>                                             <C>            <C>
                                                As Restated
Net sales                                          $43,428        $48,029
Cost of sales                                       24,587         27,241
                                                   -------        -------

     Gross profit                                   18,841         20,788

Operating expenses:
     Sales and marketing                            15,936         15,018
     Research and development                        5,599          5,653
     In-process research and development             2,300            --
     General and administrative                      2,654          2,520
                                                   -------        -------

Operating loss                                      (7,648)        (2,403)

Interest income, net                                   795            711
                                                   -------        -------

Loss before income taxes                            (6,853)        (1,692)

Income tax (benefit) provision                      (1,742)          (643)
                                                   --------       --------

Loss before equity in affiliate                     (5,111)        (1,049)

Equity in net income (loss) of affiliate               (72)            -- 
                                                   --------       --------

Net loss                                           $(5,183)       $(1,049)
                                                   --------       --------
                                                   --------       --------

Basic and Diluted loss per share                   $ (0.31)       $ (0.06)
                                                   --------       --------
                                                   --------       --------

Weighted average common shares outstanding          16,625         16,392 
                                                   --------       --------
                                                   --------       --------

Weighted averages shares outstanding assuming
   dilution                                         16,625         16,392  
                                                   --------       --------
                                                   --------       --------

</TABLE>


                             See accompanying notes.

                                     -5-

<PAGE>


                       ODS NETWORKS, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                        Six Months Ended 
                                                   --------------------------
                                                     June 30,       June 30,
                                                      1998           1997    
                                                   -----------   ------------
<S>                                               <C>            <C>
Operating Activities:                             As Restated
Net loss                                             ($ 5,183)   ($ 1,049)
Adjustments to reconcile net income (loss) to
 net cash provided (used) by operating activities:
   In-process research and development                  2,300        --
   Depreciation                                         1,692       1,530
   Amortization                                           182        --
   Equity in net loss of affiliate                         72        --
   Deferred income taxes                                 (680)     (1,265)
   Provision for doubtful accounts and returns           --            35
   Changes in operating assets and liabilities:
      Accounts receivable                              (5,349)      2,571
      Inventories                                      (1,200)      6,631
      Other assets                                          9         (39)
      Accounts payable and accrued expenses             2,170        (403)
      Deferred revenue                                    (12)       (337)
      Income taxes                                      2,632         460
                                                     --------    --------

Net cash provided by (used in)
    operating activities                               (3,367)      8,134
                                                     --------    --------
Investing Activities:
  Payments for corporate acquisition
     (net of cash acquired)                            (5,604)       --
  Equity Investment in Blue Ridge Networks             (1,250)       --
  Purchases of short-term investments                  (2,437)    (10,849)
  Maturities of short-term investments                  9,151      10,932
  Purchases of long-term investments                     (600)     (2,495)
  Maturities of long-term investments                       5          13
  Purchases of property and equipment                  (1,340)     (1,943)
                                                     --------    --------
Net cash used in investing activities                  (2,075)     (4,342)
                                                     --------    --------

Financing Activities:
  Repayment of Essential Communication Corp. 
      line of credit                                     (400)       --
  Exercise of warrants and employee stock options         271         465
                                                     --------    --------
Net cash provided by (used in) financing
  activities                                             (129)        465
                                                     --------    --------

Effect of foreign currency translation
 adjustment on cash and cash equivalents                    3          (8)
                                                     --------    --------

Net increase (decrease) in cash and cash
 equivalents                                           (5,568)      4,249

Cash and cash equivalents at beginning of
 period                                                17,911       6,565
                                                     --------    --------
Cash and cash equivalents at end of period           $ 12,343    $ 10,814
                                                     --------    --------
                                                     --------    --------


Supplemental disclosure of income taxes paid         $   --      $    239
                                                     --------    --------
                                                     --------    --------

Supplemental schedule of non cash activities:
   Tax benefit of stock options exercised
     and sold                                        $   --      $     27
                                                     --------    --------
                                                     --------    --------
</TABLE>

                             See accompanying notes.

                                      -6-

<PAGE>


                       ODS NETWORKS, INC. AND SUBSIDIARIES
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


Note A - Basis of Presentation


The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The December 31, 1997 balance sheet was derived from
audited financial statements, but does not include all the disclosures required
by generally accepted accounting principles. However, the Company believes that
the disclosures are adequate to make the information presented not misleading.
In the opinion of management, all the adjustments (consisting of normal
recurring adjustments) considered necessary for fair presentation have been
included. The results of operations for the six month period ended June 30, 1998
are not necessarily indicative of the results which may be achieved for the full
fiscal year or for any future period. The condensed consolidated financial
statements included herein should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's annual report
on Form 10-K for the year ended December 31, 1997.


Computation of Net Income Per Share

The Company adopted Statement of Financial Accounting Standards (SFAS) No. 128
on December 31, 1997 and has restated all EPS data presented. Under SFAS No. 128
the Company is required to report two separate earnings per share numbers, basic
EPS and diluted EPS. Diluted EPS is essentially the same number the Company has
previously reported as primary earnings per share and includes the dilutive
impact of employee stock options and warrants.

Equity Investment

In March 1998, the Company invested $1.25 million in Blue Ridge Networks, Inc.,
a privately-held company which provides secure remote access products for local
and wide area virtual private networks. This investment was accounted for using
the equity method of accounting. The Company's share of earnings or losses of
Blue Ridge Networks, Inc. is reported in the income statement of the Company.

Business Combinations/Restatement

On May 7, 1998, the Company acquired Essential Communication Corporation
("Essential"), a privately-held company based in Albuquerque, New Mexico.
Essential designs and manufactures high-speed computer network equipment. The
Company exchanged a combination of $5.8 million of cash and approximately
305,000 shares of the Company's common stock for all outstanding shares of
Essential capital stock, and the Company issued 104,000 stock options in
exchange for all unexpired and unexercised options to acquire Essential capital
stock. In the second quarter of 1998 in connection with the acquisition, the
Company recognized a one-time charge of $2.3 million, or $0.14 per share, for
the write-off of acquired in-process research and development as restated for
adjustment to the initial Essential acquisition purchase price allocation
wherein originally $5.3 million was allocated to in-process research and
development and was subsequently reduced by $3.0 million. The Company adjusted
the amount originally allocated to acquired in-process research and development
to reflect the new methodology set forth in the September 1998 letter from the
SEC staff to the American Institute of Certified Public Accountants. Essential's
operations have been included in the Company's condensed consolidated financial
statements since May 7, 1998, and the acquisition was accounted for using the
purchase method of accounting. The total purchase price of $9.0 million was
allocated to the net assets acquired based on their estimated fair market value,
which included approximately $7.1 million of intangible assets to be amortized
over five years on a straight-line basis; and approximately $2.3 million of
in-process research and development. The in-process research and development was
expensed at the date of the acquisition. Pro forma 

                                     -7-



<PAGE>


financial information has not been presented. The acquisition of Essential 
does not meet the reporting requirements for a significant subsidiary.

Exchange of Stock Options in First Quarter 1998

         On January 21, 1998, the Compensation Committee of the Board of
Directors approved a stock option exchange program (the Exchange Program),
pursuant to which certain employees and officers holding incentive stock options
(i) awarded under the Company's 1987 Incentive Stock Option Plan in 1997 and
(ii) awarded prior to December 31, 1997, under the Company's 1995 Stock Option
Plan (the 1995 Plan), were given the opportunity to exchange such options
(Existing Options) for new options (New Options), based on the fair market value
of the Company's Common Stock at the close of business on January 30, 1998. All
directors of the Company, including the President and Chief Executive Officer
and the Senior Vice President, were ineligible to participate in the Exchange
Program.

         As a result of significant declines in the market value of the
Company's Common Stock since issuance of the Existing Options, the Existing
Options were exercisable at prices which substantially exceeded the market value
of the Common Stock. In approving the Exchange Program and in keeping with the
Company's philosophy of utilizing equity incentives to motivate and retain
qualified employees, the Compensation Committee acknowledged that retention and
attraction of qualified employees are critical to the Company's success and its
ability to continue to meet its performance objectives. Additionally,
recognizing that stock options constitute a significant component of the
Company's compensation structure, the Compensation Committee deemed it important
to regain the incentive intended to be provided by the New Options to purchase
shares of the Company's Common Stock and therefore serve as a significant factor
in the Company's ability to continue to attract and retain the services of
superior quality personnel.

         Pursuant to the Exchange Program, holders of the Existing Options were
offered the opportunity to exchange, on a share-for-share basis, such options
for New Options having an exercise price of $7.50 per share, the fair market
value of the Company's Common Stock on the exchange date of January 30, 1998.
Each New Option was awarded under the 1995 Plan and vests and is exercisable
with respect to 20% of the shares covered thereby on each anniversary date
thereof. Eligible employees holding Existing Options for an aggregate of 646,800
shares of Common Stock with an average per share exercise price of approximately
$15.87 elected to participate in the Exchange Program and were issued New
Options covering the same aggregate number of underlying shares as they had held
pursuant to their respective Existing Options. Other than the new exercise price
and the commencement of a new vesting schedule, the option agreements relating
to the New Options are substantially identical to the option agreements of the
Existing Options they replaced.


                                     -8-



<PAGE>


Note B - Inventories (in Thousands)

Inventories consist of:

<TABLE>
<CAPTION>
                                          June 30,       Dec. 31,
                                           1998           1997  
                                         --------       ---------
<S>                                      <C>            <C>
   Raw materials                         $ 5,846        $ 4,077
   Work in process                         1,884          2,004
   Finished products                       6,007          6,593
   Demonstration systems                   2,480          1,997 
                                         -------        --------
                                         $16,217        $14,671
                                         -------        --------
                                         -------        --------

</TABLE>

Note C - Accrued Expenses (in Thousands)

Included in accrued expenses are the following:

<TABLE>
<CAPTION>
                                          June 30,       Dec. 31,
                                           1998           1997    
                                       ------------   ------------
      <S>                              <C>            <C>
      Accrued sales commissions          $  897          $  563
      Accrued property taxes                365             689
      Accrued vacation expense              881             724
      Accrued warranty expense              475             475
      Other (individually less than
       5% of current liabilities)         1,278             877
                                         ------          ------
                                         $3,896          $3,328
                                         =======        =======
</TABLE>

Note D - Earnings per Share (in Thousands, except per share amounts)

<TABLE>
<CAPTION>

                            Three Months Ended June 30,  Six Months Ended June 30,
                            ---------------------------  -------------------------
                                      1998         1997           1998         1997   
                                    -------      -------         ------       -----
<S>                                <C>          <C>             <C>          <C>
Numerator:
Net income (loss)                    $(3,209)    $   129         $(5,183)     $ (1,049)
                                     -------     -------         -------      --------
Numerator for basic and diluted
   earnings per share                $(3,209)    $   129         $(5,183)     $ (1,049)
Denominator:

Denominator for basic earnings
    per share - weighted average
    common shares outstanding         16,739      16,423          16,625        16,392
Effect of dilutive securities: 
    Stock options and warrants             0         330               0             0
Denominator for diluted earnings
    per share - adjusted weighted
    average common shares out-
    standing                          16,739      16,753          16,625        16,392
                                     -------     -------         -------      --------
                                     -------     -------         -------      --------

Basic income (loss) per share        $ (0.19)    $   .01         $ (0.31)     $  (0.06)
                                     -------     -------         -------      --------
                                     -------     -------         -------      --------

Diluted income (loss) per share .    $ (0.19)    $   .01         $ (0.31)     $  (0.06)
                                     -------     -------         -------      --------
                                     -------     -------         -------      --------
</TABLE>

                                     -9-



<PAGE>


Item 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
          CONDITION AND RESULTS OF OPERATIONS


This amended quarterly report, other than historical information, may include
forward-looking statements with respect to financial results, product
introductions, market demand, industry trends, sufficiency of cash resources and
certain other matters. These statements are made under the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995 and involve
risks and uncertainties which could cause actual results to differ materially
from those in the forward-looking statements, including those discussed
elsewhere in this filing, as well as those discussed under the heading "Factors
That May Affect Future Results of Operations" and elsewhere in the Company's
Annual Report on Form 10-K and other filings with the Securities and Exchange
Commission.

The following table sets forth, for the periods indicated, certain financial
data as a percentage of net sales:

<TABLE>
<CAPTION>
                                Three Months Ended June 30,  Six Months Ended June 30,
                                ---------------------------  -------------------------
                                        1998         1997           1998         1997 
                                        ----         ----           ----         ----
<S>                                 <C>             <C>         <C>           <C>
                                     As Restated                 As Restated
Net sales                               100.0%      100.0%           100.0%    100.0%
Cost of sales                            57.1        57.7             56.6      56.7
                                        -----       -----            -----     -----
Gross profit                             42.9        42.3             43.4      43.3
Sales and marketing expenses             32.2        28.3             36.7      31.3
Research and development expenses        11.5        10.1             12.9      11.8
In-process research and development       9.1         --               5.3       --
General and administrative expenses       5.9         4.5              6.1       5.2
                                        -----       -----            -----     -----
Operating income (loss)                 (15.8)       (0.6)           (17.6)     (5.0)
Interest income, net                      1.4         1.3              1.8       1.5
                                        -----       -----            -----     -----
Income (loss) before income taxes       (14.4)        0.7            (15.8)     (3.5)
Income tax (benefit) provision           (2.1)        0.3             (4.0)     (1.3)
                                        -----       -----            -----     -----
Income (loss) before equity in
    affiliate                           (12.3)        0.4            (11.8)     (2.2)
                                        -----       -----            -----     -----
Equity in net income (loss) of
    affiliate                            (0.3)         --             (0.1)       -- 
                                        -----       -----            -----     -----
Net income (loss)                       (12.6)%       0.4%           (11.9)%    (2.2)%
                                        -----       -----            -----     -----
                                        -----       -----            -----     -----

Switching product sales                  52.1%       42.3%            47.5%     35.7%
Shared bandwidth hub sales               40.7        52.3             44.5      58.3
Other sales                               7.2         5.4              8.0       6.0
                                        -----       -----            -----     -----
Net sales                               100.0%      100.0%           100.0%    100.0%
                                        -----       -----            -----     -----
                                        -----       -----            -----     -----

Domestic sales                           75.8%       68.3%            77.7%     72.5
Export sales to:
  Europe                                 14.1         7.7             13.3       8.7
  Canada                                  2.7         2.3              3.5       3.6
  Asia                                    7.2        18.6              5.1      12.5
  Latin America                            .2         3.1               .4       2.7
                                        -----       -----            -----     -----
Net sales                               100.0%      100.0%           100.0%    100.0%
                                        -----       -----            -----     -----
                                        -----       -----            -----     -----
</TABLE>

                                     -10-


<PAGE>



RESULTS OF OPERATIONS

         NET SALES. Net sales for the quarter and six months ended June 30, 
1998 decreased to $25.2 million and $43.4 million, respectively, compared to 
$27.9 million and $48.0 million, respectively, for the same periods of 1997 
as sales of the Company's new network switching products did not increase 
quickly enough to offset the decrease in sales of its prior generation shared 
bandwidth intelligent hubs.

         Export sales for the quarter and six months ended June 30, 1998
decreased to $6.1 million and $9.7 million, respectively, compared to $8.8
million and $13.2 million, respectively, for the same periods of 1997 primarily
due to adverse economic developments in Malaysia and South Korea.

         Sales to FORE Systems, Inc. ("FORE Systems") were 15.4% and 10.8%,
respectively, of net sales during the quarter and six months ended June 30,
1998. Direct net sales to various agencies of the U.S. Government were 15.0% and
14.5%, respectively, of net sales during the quarter and six months ended June
30, 1998, compared to 13.2% and 11.6%, respectively, of net sales for the same
periods of 1997. Sales to Electronic Data Systems Corporation ("EDS") were 2.2%
and 7.0%, respectively, of net sales during the quarter and six months ended
June 30, 1998, compared to 14.6% and 14.5%, respectively, of net sales for the
same periods of 1997. Sales to Sapura Holdings Sdn. Bhd. ("Sapura") were 5.0%
and 3.1%, respectively, of net sales during the quarter and six months ended
June 30, 1998, compared to 13.9% and 8.1%, respectively, of net sales for the
same periods of 1997.

         GROSS PROFIT. Gross profit decreased to $10.8 million or 42.9% of net
sales for the second quarter of 1998 compared to $11.8 million or 42.3% of net
sales for the second quarter of 1997. Gross profit decreased to $18.8 million or
43.4% of net sales for six months ended June 30, 1998 compared to $20.8 million
or 43.3% of net sales for the same period of 1997. Gross profit margins in
future periods may be affected by several factors such as continued product
transition, declining market demand for prior generation products, obsolescence
or surplus of inventory, shifts in product mix, changes in channels of
distribution, sales volume, fluctuation in manufacturing costs, pricing
strategies of the Company and its competitors and fluctuations in sales of
integrated third-party products. Gross profit margins are typically lower on
sales of integrated third-party products.

         SALES AND MARKETING. Sales and marketing expenses increased to $8.1
million or 32.2% of net sales for the second quarter of 1998 from $7.9 million
or 28.3% of net sales for the second quarter of 1997. Sales and marketing
expenses increased to $15.9 million or 36.7% of net sales for six months ended
June 30, 1998 compared to $15.0 million or 31.3% of net sales for the same
period of 1997. The increase in sales and marketing expense was primarily due to
the acquisition of Essential on May 7, 1998 and increased marketing efforts.
Sales and marketing expenses may vary as a percentage of net sales in the
future.

         RESEARCH AND DEVELOPMENT. Research and development expenses, excluding
the one-time charge for in-process research and development, increased to $2.9
million or 11.5% of net sales for the second quarter of 1998 from $2.8 million
or 10.1% of net sales for the second quarter of 1997. Research and development
expenses, excluding the one-time charge for in-process research and development,
decreased to $5.6 million or 12.9% of net sales for six months ended June 30,
1998 compared to $5.7 million or 11.8% of net sales for the same period of 1997.
The Company expects to continue to invest in research and development activities
in the future in order to broaden its family of network switching, management
and security products.

                                     -11-



<PAGE>


         IN-PROCESS RESEARCH AND DEVELOPMENT. During the second quarter of 1998,
the Company incurred a one-time charge associated with the acquisition of
Essential of $2.3 million to write-off acquired in-process research and
development that had not reached technological feasibility, as restated for
adjustment to the initial Essential acquisition purchase price allocation
wherein originally $5.3 million was allocated to in-process research and
development and was subsequently reduced by $3.0 million. The Company adjusted
the amount originally allocated to acquired in-process research and development
to reflect the new methodology set forth in the September 1998 letter from the
SEC staff to the American Institute of Certified Public Accountants.


         GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased to $1.5 million or 5.9% of net sales for the second quarter of 1998
from $1.3 million or 4.5% of net sales for the second quarter of 1997. General
and administrative expenses increased to $2.7 million or 6.1% of net sales for
six months ended June 30, 1998 compared to $2.5 million or 5.2% of net sales for
the same period of 1997. The increase in general and administrative expenses for
the second quarter of 1998 was primarily due to the amortization of intangibles
related to the acquisition of Essential on May 7, 1998. General and
administrative expenses may vary as a percentage of net sales in the future.

         INTEREST. Net interest income remained relatively constant at $0.4
million and $0.8 million, respectively, for the quarter and six months ended
June 30, 1998 compared to $0.4 million and $0.7 million, respectively, for the
same periods of 1997. Net interest income may vary in the future based on the
Company's cash flow and rate of return on investments.

         INCOME TAXES. The Company's effective income tax rate was 8% and 17.7%,
respectively, for the quarter and six months ended June 30, 1998 compared to the
38.0% for the same periods of 1997. The effective tax rate represented by the
Company's provision for income taxes in the second quarter ended June 30, 1998
would have been approximately 37.1%, disregarding the expenses associated with
the Company's write-off of purchased research and development costs which were
not deductible for tax purposes.

LIQUIDITY AND CAPITAL RESOURCES

         The Company's principal sources of liquidity at June 30, 1998 were
$12.3 million of cash and cash equivalents, $9.0 million of short-term
investments, $2.8 million of highly liquid investments with a stated maturity
beyond one year and an available line of credit. As of June 30, 1998, working
capital was $42.9 million compared to $51.8 million as of December 31, 1997.

         Cash flows used in operations for the first six months of 1998 were
$3.4 million, primarily due to an increase in inventory and accounts receivable
balances and a net loss for the period partially offset by an increase in
accounts payable. Future fluctuations in accounts receivable and inventory
balances will be dependent upon several factors, including but not limited to
quarterly sales, ability to collect accounts receivable timely, the Company's
strategy as to building inventory in advance of receiving orders from customers,
and the accuracy of the Company's forecasts of product demand and component
requirements.

         Cash used in investing activities in the first six months of 1998 was
$2.1 million, primarily due to property and equipment purchases of $1.3 million,
an equity investment in Blue Ridge Networks, Inc. of $1.25 million and cash used
in the acquisition of Essential Communications Corporation of $5.6 million
offset by net maturities of short-term and long-term investments of $6.1
million.

                                     -12-


<PAGE>


         Cash used in financing activities in the first six months of 1998 was
$0.1 million, due to the repayment of Essential's line of credit in the amount
of $0.4 million offset by the issuance of Common Stock relating to the exercise
of certain employee stock options in the amount of $0.3 million.

         During the first six months of 1998, the Company funded its operations
solely through cash flows from operations. The Company has a bank line of credit
agreement with $15.0 million of maximum available borrowings. Borrowings under
this line are secured by the Company's accounts receivable and inventory and are
subject to certain limitations and conditions, including the maintenance of
certain financial ratios and minimum net tangible worth amounts. Borrowings on
this line accrue interest at prime with interest due monthly and principal due
April 12, 1999. As of June 30, 1998, the Company had no borrowings outstanding
under its bank credit facility and had $15.0 million available for allowable
borrowings at an applicable interest rate of 8.5% per annum.

         The Company intends to seek acquisitions of businesses, products and
technologies that are complementary to those of the Company. The Company is
continuing to identify and prioritize additional networking and security
technologies which it may wish to develop, either internally or through the
licensing or acquisition of products from third parties. While the Company
engages from time to time in discussions with respect to potential acquisitions,
there can be no assurances that any such acquisitions will be made or that the
Company will be able to successfully integrate any acquired business. In order
to finance such acquisitions, it may be necessary for the Company to raise
additional funds through public or private financings. Any equity or debt
financings, if available at all, may be on terms which are not favorable to the
Company and , in the case of equity financings, may result in dilution to the
Company's stockholders.


FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS

As noted above, this report, includes the foregoing discussions and includes
forward-looking statements that involve risks and uncertainties. The factors
discussed elsewhere in this amended quarterly report and those discussed in the
Company's annual report on Form 10-K and other filings with the Securities and
Exchange Commission, identify factors which could affect the Company's actual
results and cause actual results to differ materially from those in the
forward-looking statements.


                                     -13-

<PAGE>



                           PART II - OTHER INFORMATION

Item 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

            The Annual Meeting of Stockholders was held on April 21, 1998 at 
            the Holiday Inn Richardson Select in Richardson, Texas. The 
            following is a brief description of each matter voted upon by 
            stockholders, including number of votes cast for, against, or 
            withheld with regard to each matter of nominee.

           (1) Election of five (5) directors to serve until the next Annual 
               Meeting of Stockholders and until their respective successors 
               are duly elected and qualified.

<TABLE>
<CAPTION>
                                          FOR            WITHHELD 
                                       ----------        --------
           <S>                         <C>               <C>
           G. Ward Paxton              14,979,571         140,512
           Robert Anderson             14,979,121         140,962
           J. Fred Bucy                14,982,825         137,258
           T. Joe Head                 14,985,320         134,763
           Donald M. Johnston          14,986,070         134,013
</TABLE>

           (2) Ratification and approval of selection by the Board of 
               Directors of Ernst & Young LLP as independent auditors of the 
               Registrant for the fiscal year ending December 31, 1998.

<TABLE>
<CAPTION>
                               FOR            AGAINST          WITHHELD  
                             ----------       -------          --------
                             <S>              <C>              <C>
                             15,062,577       19,969           37,537
</TABLE>

Item 5.     OTHER INFORMATION.

            Stockholder Proposals

Stockholders may submit proposals on matters appropriate for stockholder action
at subsequent annual meetings of the stockholders consistent with Rule 14a-8
promulgated under the Exchange Act. For such proposals to be considered for
inclusion in the Proxy Statement and Proxy relating to the 1999 Annual Meeting
of Stockholders, such proposals must be received by the Company not later than
November 21, 1998. Such proposals should be directed to ODS Networks, Inc., 1101
East Arapaho Road, Richardson, Texas 75081, Attention: Secretary (telephone:
(972) 234-6400; telecopy: (972) 234-1467.

Pursuant to new amendments to Rule 14a-4(c) of the Securities Exchange Act of
1934, as amended, if a stockholder who intends to present a proposal at the 1999
annual meeting of stockholders does not notify the Company of such proposal on
or prior to February 3, 1999, then management proxies would be allowed to use
their discretionary voting authority to vote on the proposal when the proposal
is raised at the annual meeting, even though there is no discussion of the
proposal in the 1999 proxy statement.

Item 6.           EXHIBITS AND REPORTS ON FORM 8-K.

                  (A.)  Exhibits.  The following exhibits are included herein:

                       (10.13) First Amendment Agreement to Third Amended and 
                               Restated Revolving Credit Loan Agreement, 
                               dated April 30, 1998, 

                                     -14-



<PAGE>

                               between NationsBank of Texas, N.A. (formerly, 
                               NCNB Texas National Bank) and the Company.

                      (10.14)  Amendment to the ODS 401(K) Savings Plan, 
                               Effective May 29, 1998

                      (27)     Financial Data Schedule

                (B.)  Form 8-K.  On May 21,  1998,  the  Company  filed a 
                                 report  on Form 8-K to nnounce the 
                                 acquisition of Essential Communications 
                                 Corporation.

                                     -15-

<PAGE>


                               S I G N A T U R E S


Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.



                                    ODS NETWORKS, INC.
                                        (Company)



Date: March 29, 1999         By:   /s/ Timothy W. Kinnnear
                             -----------------------------------
                                  Timothy W. Kinnear
                                Chief Financial Officer
                              (Principal Financial Officer and
                               Principal Accounting Officer)


                                     -16-



<PAGE>

                                  EXHIBIT INDEX

EXHIBIT

      10.13* First Amendment Agreement to Third Amended and Restated 
             Revolving Credit Loan Agreement, dated April 30, 1998, between 
             NationsBank of Texas, N.A. (formerly NCNB Texas National Bank) 
             and the Company.

      10.14* Amendment to the ODS 401(K) Savings Plan, Effective May 29, 1998.

        27** Financial Data Schedule
        -----------------
         *  Filed as an Exhibit in the Registrant's Quarterly Report on
            Form 10Q, dated August 14, 1998 (File No. 0-20191), which
            Exhibit is incorporated herein by reference.

        **  Filed herewith

                                     -17-